RSS feedsShareholders, staff, suppliers and many a loyal customer of Sainsbury’s and Marks & Spencer should be happy that these two darlings of the British high street have, in recent weeks, reported fairly impressive financial results.
Sainsbury’s, the former market leader, had for years been losing ground to more eager rivals such as Tesco and Asda. But under chief executive Justin King’s new regime, it recently reported seven consecutive quarters of sales and market share growth. Sales rose more than 8% to £9.55bn, while underlying store profits (stripping out services like banking) reached £215m, up 28%.
The Marks & Spencer revival is also well and truly established, so it’s easy to forget that just two years ago, when fighting a takeover bid from Philip Green of Topshop and Littlewoods fame, many experts were writing it off, believing its decline to be terminal. For years, the retailer couldn’t seem to put a foot right. Led by Stuart Rose, the business is booming and the future looks very promising. There is even talk of Marks & Spencer opening stores abroad again.
While most of us don’t work as CEOs for companies as large as M&S and Sainsbury’s, we can still learn lessons from these two giants.
Importantly, these lessons apply to companies that don’t need a complete root and branch overhaul, but want to do what every good business should: boost profits.
New Year goals
With the New Year looming and with resolutions needing to be made, why not think about what your clients can do to make 2007 a bumper year?
What can we learn from Sainsbury’s? One of King’s main growth ploys is investing substantially in the business. Rather than take the acquisition route like Morrisons, which bought Safeway, King instead invested in a new store opening and an old store refitting programme. To do this, capital spending for the first half of the year increased to £391m, compared with £175m during the same period of 2005, and for the whole year it is likely to top £800m.
This is classic investing for growth, but easier to do with a huge physical asset base like Sainsbury’s, which can borrow against its store property portfolio. Most businesses don’t have large assets to sweat, so find it hard to get money from banks or specialist investors like venture capital or private equity backers.
Common sense
However, raising money is mostly common sense and there are plenty of good accountants or corporate finance experts to call on for advice.
Before seeing potential investors, you must recognise that successful fund raising depends on decent management information and a well-prepared, comprehensive investment proposal based on realistic assumptions. This should be concise and highlight the skills and experience of the management team. Investors are much more interested in people than in ideas and fancy forecasts.
Business plans should include a pragmatic analysis, showing potential investors what happens when things change. Too many investment proposals are one-dimensional, explaining only one possible financial outcome. Investment proposals must be vetted by an experienced third party.
If a company is struggling and needs money to stay afloat, then only raise new money alongside other measures, such as sensible cost cutting and reinvigorated sales and marketing.
When running short of cash, the first principle is never leave fund raising too late. It always takes longer than you think, so start looking for money at least six months before you need it. If you leave it too late, prospective investors will spot your desperation and take advantage by demanding greedy amounts of equity, or declining the opportunity because the risk has become too great.
Part of successfully raising money is to reassure investors that you can accurately forecast and understand your own management accounts. In too many of the turnaround cases I’ve worked on, the management accounts are poorly kept and often bear little relation to the real performance of the business.
So resolve to freshen up your management accounts now, so that they are ready for 2007. Your management accounts should be a real working document and regularly reviewed, at least every month.
Don’t just plot sales and costs of sales, as in the traditional profit and loss account. Use other key performance indications (KPIs) such as the number of sales leads, the conversion rate from lead to sale and the size of order books.
The only information that traditional management accounts give about sales is the value of invoices raised. But for many businesses that kind of backward-looking ‘lag indicator’ is not that useful for understanding what is happening, or predicting what will happen. So build in other KPIs that give you a better feeling for what’s going to happen.
Realistic targets
Share targets with your colleagues, but be realistic. Don’t set sales staff unrealistic targets that they will never hit. This is demotivating, while realistic targets encourage and give staff a strong sense of achievement knowing goals are being met.
While targets are great, I like businesses that are cautious about new sales. Another discipline I like is strict cost controls and managers who know the difference between turnover and profit margins.
While rising turnover looks encouraging, it can be deceptive. It is far better to increase profit margins rather than ‘buy’ turnover. Any inept businessperson can sell products or services at below break even rates. This will never produce the funds necessary to fuel further growth, but will soon lead to insolvency. Therefore, analyse your margins and make sure they are at least in line with your own marketplace and are sufficient to sustain a profitable business.
Again, it’s best practice to regularly review suppliers. If you haven’t done this for a while, it might be a good task to tackle early in 2007. Most suppliers have a natural tendency to sneak their costs up. Make it an annual habit to review all the main suppliers and test their costs against competitors in the market.
This may not require a formal review with a series of meetings, because it’s time consuming for both sides. If you are essentially happy with your supplier, just do desk research to see if you are paying broadly in line with others. However, remember that cost doesn’t equal value and beware of replacing a good supplier that is serving you well for a new one that promises the earth, but could prove to be far less reliable.
Avoid complacency
Last, one more lesson from Sainsbury’s and Marks & Spencer. Both these retailers had become so much a part of the British landscape they started to believe they had a right to exist. They became inward facing, bureaucratic and change averse. Importantly, they took their eye off what competitors were doing. Even worse, they neglected the needs of the customer.
For Sainsbury’s, turning things around meant providing better quality foods, with far better availability at lower prices. Marks & Spencer introduced more fashionable clothing, more ranges, shorter seasons and, of course, started using revolutionary (for them) marketing methods such as national TV and press advertising. It also reviewed its supply chain and, for the first time, sourced clothes from India and the Far East, cutting costs enormously without sacrificing quality.
Neither firm reinvented itself from scratch; their current success is based on simply doing what they used to in their early growth years.
INVESTING IN SUCCESS
Raising finances
• Raise enough money in the first place.
• Find an investor who adds value, not just money.
• Identify the investor’s agenda and make sure you can live with it.
• Maximise your assets before you give away equity.
• Link broker fees to their success.
• A decent investment proposal and business plan is fundamental.
• Be confident, but realistic in your forecasts.
• Get an outside view.
• Think about your investor’s exit route.
Financial controls
• Ensure regular production of management accounts.
• Plot key performance indicators to monitor your business.
• Share realistic and attainable targets with your team.
• Compare your figures with the budget or business plan and revise if necessary.
• Leave a margin of error in case costs increase or sales fall.
• Review your suppliers regularly to check you are getting the right deal.
• Be driven by margins, not by turnover.
• Keep a close eye on working capital.
• Remember, profit doesn’t necessarily equate to cash in the bank, so keep
sufficient liquid funds to meet running costs.
Sales and marketing
• Revise your marketing strategy.
• Use a marketing plan that sets out specific actions, dates, costs, resources
and so on.
• Measure the effectiveness of your marketing and change it if it’s not working.
• Understand your customers’ needs.
• Aim to reach customers through their preferred sales channels.
• Target the decision-makers.
• Take a fresh look at your competitors, who they are and what they offer.
• Forecast sales to avoid unforeseen cashflow problems and get an experienced
person to give feedback.
• Use public market information, emerging market trends and your own market
research to deepen understanding of the marketplace.
Mark Fry is managing partner for the south east at Begbies Traynor
